Euro zone government bond yields fell and were on track to end the week lower after Federal Reserve Chairman Jerome Powell said on Friday the U.S. central bank would support a strong labor market.
Powell offered his support for an imminent easing of monetary policy, adding that a further cooling of the labor market would not be welcome.
Markets slightly increased their bets on future Fed rate cuts, pricing in 102 basis points (bps) by year-end from 97 bps (FEDWATCH) before Powell’s speech.
The yield on 10-year German government bonds fell 2 basis points to 2.22 percent. It had risen 1.5 basis points to 2.26 percent before Powell’s speech. It was on track to end the week 3.5 basis points lower.
“They don’t want further weakness, so another rise in unemployment to 4.4 percent or 4.5 percent could trigger a 50 basis point move (by the Fed),” said James Knightley, chief U.S. economist at ING.
Markets priced in 33 basis points in September, which fully prices in a 25 basis point cut by the Fed and a 30 percent chance of a 50 basis point reduction. FEDWATCH
Investors have priced in around 70 basis points of European Central Bank rate cuts by year-end, up from 65 basis points pre-Powell.
A growing number of ECB policymakers are lining up behind another rate cut in September and only big surprises in data in the coming weeks could delay a move, according to on- and off-the-record conversations with seven sources.
Euro zone consumers’ inflation expectations for the next 12 months remained stable for a third month in July, an ECB survey showed on Friday.
The yield on Italian 10-year government bonds, the benchmark for the euro zone periphery, fell 5 basis points to 3.56 percent, and the yield spread with its German peers narrowed to 133 basis points.
The gap between German and French borrowing costs – a measure of the risk premium investors demand to hold French government bonds – was 70 basis points. It reached 88 basis points in early August, its highest level since 2012, and hit 85 basis points during the French elections.
Markets are closely following political developments in France as President Emmanuel Macron faces tough challenges.
Parliamentary approval of the 2025 budget is one of many tests at a time when France is under pressure from the European Commission and bond markets to reduce its deficit.
Macron began meeting party leaders on Friday with the aim, nearly seven weeks after an inconclusive parliamentary election, of finally giving the country a new prime minister.
Investors were also assessing the impact of Thursday’s economic figures, with borrowing costs snapping a four-day losing streak on Thursday following euro zone economic data.
Analysts said the positive impact of the Paris Olympics on French services sector sentiment, which rose 4.9 points to 55.0, was a key – and likely temporary – driver of the positive surprise in euro zone PMIs.
Negotiated wage growth in the euro area slowed in the second quarter, mainly due to a significant slowdown in Germany.
“For the third quarter, this index (a Citi wage tracker) suggests a sharp reacceleration in German negotiated wage growth from 3.4 percent to 5.7 percent, mainly due to a one-off payment of 1,000 euros in the wholesale sector in August,” said Christian Schulz, European economist at Citi.
He argued that the second-quarter decline was entirely due to falling German wage growth, which was driven by volatile one-off payments.
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